The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge
GRANTING THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING THE DEFENDANT'S CROSS MOTION FOR SUMMARY JUDGMENT
This matter comes before the court on the parties' cross motions for summary judgment. The plaintiff is a hospital that facilitates and operates a skilled nursing facility ("SNF"). The defendant is the Secretary of the United States Department of Health and Human Services and is responsible for the administration of the Medicare program, including reimbursing SNFs for reasonable costs incurred in treating Medicare patients. The plaintiff alleges that the defendant denied it approximately $2,400,000 in reasonable costs in 1991 and 1993 by applying section 2534.5 of the Provider Reimbursement Manual ("PRM") in violation of the Administrative Procedures Act ("APA") and the Medicare statute. Because the defendant violated the APA by failing to engage in the prescribed notice and comment rulemaking procedures, the court grants the plaintiff's motion for summary judgment and denies the defendant's cross motion for summary judgment.
II. FACTUAL & PROCEDURAL BACKGROUND
Medicare is a federal health insurance program covering patients who are at least 65 years of age and are disabled. 42 U.S.C. § 1395i-2(a). The plaintiff provides SNF services to Medicare patients. Compl. ¶ 6. These services are covered under the Medicare statute. 42 U.S.C. § 1395d(a)(2). The defendant is responsible for determining the amounts payable to SNFs for providing these services to Medicare patients. 42 U.S.C. § 1395g(a). The defendant delegates management of the Medicare program to the Centers for Medicare and Medicaid Services ("CMS"),*fn1 an agency within the Department of Health and Human Services. 42 C.F.R. §§ 405.500, et seq. In addition, the defendant contracts with private organizations to act as fiscal intermediaries charged with making initial reimbursement determinations. 42 U.S.C. § 1395h(a); 42 C.F.R. § 400.202.
SNFs are eligible to receive reimbursement for reasonable costs expended in providing services to Medicare patients. 42 U.S.C. § 1395d(a)(2). A "reasonable cost" is a cost "actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A). To assist in determining reasonable costs, Congress authorized the defendant to establish routine per diem cost limits ("cost limits"). Id. The statute provides for exceptions to these cost limits when SNFs render atypical services. 42 C.F.R. § 413.30(f)(1) (1986).*fn2 During the periods in question the statute dictated that, to be granted an atypical cost exception, an SNF must show that the
(i) Actual cost of the items or services furnished by a provider exceeds the applicable limit because such items or services are atypical in nature and scope, compared to the items or services generally furnished by providers similarly classified; and
(ii) Atypical items or services are furnished because of the special needs of the patients treated and are necessary in the efficient delivery of health care.
For 15 years the defendant allowed reimbursements of all reasonable costs up to and exceeding the cost limit incurred in the administration of atypical services. Admin. R. at 41. In 1994, the Health Care Financing Administration (now CMS) issued PRM § 2534.5 without engaging in the notice and comment procedures. Compl. ¶ 34. Pursuant to PRM § 2534.5, the amount of the atypical services exception (i.e., the amount above the cost limit that the defendant was willing to reimburse) would be measured not from the cost limit, but from 112% of the SNF's peer group mean.*fn3 Compl. ¶ 22. By creating a gap between the cost limit and 112% of the SNF's peer group mean PRM § 2534.5 precluded the plaintiff from recovering its entire costs. Admin. R. at 41. The 1994 PRM provision was applied retroactively to the plaintiff resulting in reimbursements significantly less than its actual costs in 1991 and 1993. Compl. ¶ 23.
The plaintiff appealed the defendant's application of PRM § 2534.5 to the PRRB. On June 5, 2006, the PRRB determined that the plaintiff should be awarded all costs in excess of the cost limit in part because PRM § 2534.5 constituted a change in policy and was issued without notice and comment rulemaking. Admin. R. at 31-45. The defendant then issued a decision reversing the PRRB on July 21, 2006, concluding that PRM § 2534.5 is not a substantive rule and therefore notice and comment procedures were unnecessary. Admin. R. at 2-14.
On September 21, 2006, the plaintiff filed a complaint in this court for review of the July 21, 2006 decision. The defendant answered the complaint on January 30, 2007, and subsequently the parties filed cross motions for summary judgment. In its motion, the plaintiff alleges that PRM § 2534.5 is an erroneous interpretation of the law; that it violates the APA because the defendant did not engage in notice and comment rulemaking; that PRM § 2534.5 is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law"; and that it was improper to apply it retroactively. See generally Pl.'s Mot. for Summ. J. ("Pl.'s Mot."). The defendant disagrees on all counts and argues that the costs were denied because they were not reasonable. Def.'s ...